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DE RUEHQT #0906/01 1101854
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O 201854Z APR 07
FM AMEMBASSY QUITO
TO RUEHC/SECSTATE WASHDC IMMEDIATE 6818
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UNCLAS QUITO 000906 
 
SIPDIS 
 
SENSITIVE 
SIPDIS 
 
DEPT FOR WHA/EPSC FAITH CORNEILLE 
TREASURY FOR SGOOCH 
 
E.O. 12958: N/A 
TAGS: ECON EPET EINV EC
SUBJECT: ECUADOR'S ITT FIELDS UNDER CONSIDERATION ONCE AGAIN 
 
REF A: Quito 394 
REF B: 06 Quito 2386 
REF C: 06 Quito 1920 
 
¶1.  (SBU) Summary:  Development of Ecuador's heavy crude ITT fields 
has been under discussion for over 10 years.  Situated in the 
environmentally sensitive Yasuni National Park, the three fields 
contain an estimated billion barrels of reserves and could 
potentially produce 190,000 barrels of crude oil per day, with a 
project price tag of between 3 and 4 billion dollars.  If realized, 
the project could boost Ecuador's petroleum production (now falling 
due to lack of investment, Ref A), the government's revenues, and 
Ecuador's balance of trade.  However, environmental and legal 
concerns, the substantial investment costs required for a project of 
this magnitude, and unclear and seemingly divergent administration 
views on how to develop the fields could delay the project.  The 
administration is clearly looking to move forward with ITT, but its 
message on how to do so is confused.  Nevertheless, the fact that 
the project is moving at all could signal a change in policy for 
Ecuador's stagnant petroleum sector.  End Summary. 
 
¶2.  (SBU) The size of the Ishpingo-Tambococha-Tiputini (ITT) fields 
means its development is of interest to oil majors, but to date the 
GOE has not presented a specific invitation for bids.  In late 2006, 
Government of Ecuador (GOE) representatives in the Palacio 
administration told us they planned to put the project out for 
international bid before the end of the year (Ref B).  In the end 
the GOE decided it was an issue "for the next government to decide," 
and took no action.  In the early days of the Correa administration, 
development seemed unlikely under new Energy Minister Alberto 
Acosta, who favored a moratorium on new petroleum projects in the 
southern Oriente region and did not appear concerned about Ecuador's 
falling petroleum production.  However, talk of possible ITT 
development surfaced again recently, spurred by Petroecuador 
President Carlos Pareja's efforts to coordinate a development 
proposal with a number of state oil companies. 
 
Controversy Over GOE Options 
---------------------------- 
 
¶3.  (SBU) Tension between Acosta and Pareja over possible 
development of ITT has been widely reported in the press.  Acosta 
announced a proposal that the international environmental NGO 
community compensate the GOE $700 million for not developing the 
fields, to avoid the environmental damage such a large project could 
cause.  Pareja had meanwhile been working with foreign state oil 
companies Petrobras (Brazil), SIPC-Sinopec (China), and ENAP (Chile) 
on the possibility of a joint consortium proposal to develop the 
fields (these firms had all previously expressed interest in the 
project).  Acosta asserted to the press that only fully state-owned 
companies should be considered for ITT development and that it 
remained to be seen "whether Petrobras is considered a state 
company" (note: Petrobras is a "hybrid" company with significant 
private ownership).  He later retracted his statement. 
 
¶4.  (SBU) Amidst the controversy, President Correa intervened to 
clarify the GOE position.  Correa announced he was faced with a 
"dilemma of conscience" regarding the project.  His first choice 
would be to leave the oil in the ground and receive compensation not 
to develop the fields (although he cut Acosta's compensation figure 
in half).  Failing that, he would want Petroecuador to develop ITT 
using its own resources (industry experts, including from within 
Petroecuador, believe this is unrealistic given Petroecuador's poor 
financial situation (Ref C)).  Development by a consortium of state 
oil companies would be a third option, followed by putting the 
project out for international bid. 
 
¶5.  (SBU) Petroecuador's Planning Director noted he believes that 
the consortium option is the favored "realistic" GOE option, but did 
not rule out a possible international tender.  He commented that 
state companies don't always finalize contracts, and implied that 
their investment plans are influenced by their country's political 
objectives, which can easily change.  Pareja has pushed the 
consortium idea, signing a preliminary MOU with the companies 
involved, but most recently announced that due to "unusual interest" 
the ITT project would be put out for international bid in May.  With 
so many divergent public announcements on the issue, it is unclear 
how, or even whether, the ITT project will be awarded in the end. 
 
Petroecuador's Consortium MOU 
----------------------------- 
 
¶6.  (SBU) On April 4, Pareja accompanied President Correa on his 
trip to Brazil and signed a non-binding memorandum of understanding 
(MOU) between Petroecuador and Petrobras, ENAP, and SIPC-Sinopec on 
possible future development of the ITT fields.  The consortium 
reportedly has a period of 90 days starting from March 26 to 
complete a technical evaluation of the fields and submit a joint 
proposal for development.  The proposal would include a plan for 
confirming reserves, and a preliminary development plan and early 
production plan.  It would also include a proposal, if feasible, for 
building a plant to upgrade the oil produced and an electricity 
plant that would use the upgrade plant's residues as fuel. 
Petrobras has told us they would be interested in leading the 
potential project, based on their experience in Ecuador and the fact 
that their Block 31 (not currently operational due to environmental 
issues) adjoins the ITT fields. 
 
¶7.  (SBU) A team of experts from the consortium are working together 
to analyze Petroecuador's existing data on the fields.  A 2005 
analysis by French engineers serves as the basis for the work, but 
lacks the hard technical data needed to develop a substantive 
proposal.  GOE requirements include strict compliance with 
environmental laws, and a minimum 50 percent share of revenues 
(based on reforms to Ecuador's hydrocarbons law in 2006).  Referring 
to the consortium, Petroecuador's Planning Director remarked that 
Petroecuador will review proposals in June or July and then make a 
decision on the project.  He predicts that it will take 12-18 months 
to be ready for production, and an additional 12-18 months for the 
plants to be operational.  He noted that Petroecuador could decide 
to start petroleum production before a potential plant-building 
phase. 
 
Will Venezuela Join In? 
----------------------- 
 
¶8.  (SBU) Another key player that might be involved in ITT is 
Venezuela state oil company PDVSA.  Pareja had not included PDVSA in 
his initial plans for ITT (some local analysts believe it is because 
he does not consider PDVSA to be a viable player).  However, Acosta 
reportedly supports PDVSA for the project, and when Pareja 
accompanied Acosta to a regional energy summit in Venezuela on April 
16 and 17, he extended an offer to PDVSA to join the existing 
consortium or present a separate bid.  Press from the summit 
reported that PDVSA Vice President Luis Vierma said PDVSA "is 
negotiating, and there is a large possibility" of participation. 
Whether PDVSA would join the consortium or choose to submit a 
separate proposal on its own remains to be seen (Petroecuador's 
Planning Director commented that PDVSA might be interested in 
submitting a joint proposal with Turkish Petroleum).  Petrobras 
representatives noted that PDVSA involvement might increase the 
political viability of the project within Ecuador. 
 
Other Countries Interested 
-------------------------- 
 
¶9.  (SBU) Other countries reportedly interested in the project 
include state companies from Japan, Malaysia, India, Argentina, 
Colombia, and Peru, and private French company Total.  Post is not 
aware of any U.S. companies that are interested in investing in ITT. 
 
 
Environmental and Legal Issues 
------------------------------ 
 
¶10.  (SBU) In the environment arena, a number of issues will likely 
challenge ITT development.  First, the project is located in an 
environmentally sensitive national park that could contain 
uncontacted indigenous tribes.  The park would be disturbed not only 
by the wells, but by the transportation links needed to build the 
project and the pipelines needed to get the oil out.  Environmental 
and indigenous-rights NGOs will likely protest the development 
project.  Petroleum projects must also receive approval of 
environmental impact studies from the Ministry of Environment before 
any activities can take place.  This approval could be contentious 
if environmental activists and indigenous community members actively 
protest.  Another consideration is that half of the Ishpingo field 
in the south part of the ITT block is partially located in an area 
the Environment Minister declared as "untouchable" in 2006, meaning 
that that part of the field will likely not be available for 
development. 
 
¶11.  (SBU) There are also differing legal opinions regarding whether 
an alliance or consortium of companies would be permitted to develop 
the fields, and whether private or only state companies could 
participate.  Some experts also point to an existing Ecuadorian law 
which requires heavy crude fields to be developed through integrated 
projects that include both upstream and downstream operations.  They 
believe that only a development project that includes 
industrialization would be permitted under Ecuadorian law.  In the 
complex legal framework surrounding the petroleum sector, concerns 
of a legal challenge to a development project are very real. 
 
COMMENT: 
-------- 
¶12.  (SBU) It is notable that the GOE is focusing on this project at 
the beginning of the administration, when there is potential for 
real progress.  Based on initial GOE comments that oil contracts 
would be renegotiated and that there could be a moratorium on 
exploration in certain areas of the country, we believed the 
petroleum sector in Ecuador would stagnate.  However, there appears 
to be an effort, at least by the state oil company, to move forward, 
and Pareja appears (for now) to have the political clout to bring 
the Energy Ministry along with him.  In fact, although messages to 
the press on how to develop ITT have been confused, they indicate 
that Acosta's idea of receiving compensation to "leave the oil in 
the ground" no longer appears to be in contention. 
 
¶13.   (SBU) The GOE is groping for a solution on how to deal with 
ITT, but how it will play out is very unclear.  The power struggle 
between Acosta and Pareja may resurface, should PDVSA (who Acosta 
reportedly supports) submit its own proposal for development. 
Although Pareja reportedly favors the consortium option, it is not 
necessarily the best way to develop the fields.  State companies may 
not have the most advanced technologies and environmental expertise, 
and foregoing a competitive bid process could reduce transparency 
and competition for best price and proposals.  END COMMENT. 
 
JEWELL